Talking Points
Dollar Heading into Breakout Pattern Ahead of NFPs
It always helps the case for a breakout when there is both a capable fundamental trigger in the foreseeable future and an underlying technical pattern that essentially necessitates a drive from congestion. That is the situation the dollar currently finds itself in. From the more liquid majors (USD-based pairings), we find EUR/USD in a 60-pip range below 1.3650, GBP/USD oscillating just below 1.6750 following a critical bearish shift last week, and anchored for a month-and-a-half to 0.9200. For the Dow Jones FXCM Dollar Index, this translated into a modest 45-point range below 10,530 that is holding back a recent recovery effort. Even in these low volatility conditions – the FX-based VIX is just a few days removed from its 7-year low – it is difficult to maintain such a narrow trading corridor without at least tripping speculative stop and entry orders set just beyond the closely monitored boundaries.
Moving forward, the most capable drivers for the dollar are those events that can stir a deeper current of risk appetite trends or meaningfully alter the course of US-based interest rate forecasts. Thursday’s ECB rate decision can potentially tap global risk appetite given the discussion of a new stimulus – and the potential schadenfreude of a Euro stimulus program can significantly leverage the dollar. Yet, it is Friday’s US labor statistics for May that promises the more direct hit. In the meantime, we have seen the recent bounce in short-term expected FX volatility readings give the dollar a quiet bid. Meanwhile, the 2 and 10-year Treasury yields have advanced. Fed members George and Fisher both spoke this past session, but their hawkish bearings are unlikely swaying the expected FOMC vote count going forward. On the docket today, the ISM service sector survey and ADP employment reports for May as well as the April trade report are top event risk.
Euro Traders Enter Bear Trend Moratorium Ahead of ECB
We are little more than 24 hours out from one of the most important events for the Euro in months. Given the speculation surrounding Thursday’s European Central Bank (ECB) decision, it will be increasingly difficult for the market to keep the currency under trend – bullish or bearish. The consensus heading into this event is for the adoption of further unconventional accommodation. That means a easing that potentially goes beyond a rate cut. The median expectation is for both a cut to the benchmark rate to 0.15 percent and a negative deposit rate of 0.10 percent. Beyond that, there is heavy speculation of something more along the lines of stimulus or targeted lending – difficult to gauge for economic / currency / exchange rate impact. So many unknowns are likely to keep traders from being too cavalier with EUR/USD.
Australian Dollar Rallies after 1Q GDP Beats
The Australian dollar was outperforming most of its major counterparts this past session following the RBA’s policy update. While the central bank didn’t change its stance nor materially alter its tone, the currency was finding its way higher alongside the country’s 10-year government bond yield. In fact, over the past week, the benchmark yield is up 5 percent from its 11-month low set last week. Helping further ramp the AUD this morning was a better-than-expected showing for the 1Q GDP reading. A 1.1 percent expansion through the opening period of the year has curbed fears of a Chinese-led slump and simultaneously lifted the (still-distant) rate outlook.
British Pound Trend Coming Under Increased Pressure
With Cable (GBP/USD) having already slipped below 1.6750 and throwing the benchmark pair’s bull trend into doubt, there is a growing doubt over the progress the sterling can make on its rate forecasts. In the market, the 2-year Gilt’s yield advantage over its US counterpart is already at 29 bps – a significant retreat from the two-and-a-half year high 39 bps set last month. The UK docket would be more effective in further trimming that advantage should it face disappointing data. Ahead, we have the service sector PMI and Halifax housing inflation reports for May.
Canadian Dollar Sliding Ahead of BoC Rate Decision
The Canadian dollar has turned in one of the worst performances of the major currencies as of late. This past session, the loonie was down versus most counterparts, and so far this morning, the losses are spread out versus all its peers. From yields, we have actually seen a pop in the 10-year government rate that has fallen in line with the global push – but that clearly hasn’t helped bulls. Ahead, the docket carries April trade data and the BoC rate decision. A change in policy isn’t on the menu, but a shift in tone and yield forecasts may prove a driver yet again.
Emerging-Market Currencies and Sovereign Debt Tumble while Equities Rise
Emerging markets have shown a varied performance across different asset classes. From the stock-based MSCI ETF, a 0.6 percent advance is the fourth advance in five trading days – though we are notably still far from reviving the bull trend from past months. Alternatively, the JPMorgan Emerging Market currency index suffered its second biggest drop in three months (0.4 percent) while the Bloomberg sovereign bond index has suffered its biggest drop (0.3 percent) in two months. Once again the South African Rand tops the list in a now 3.5 percent, three-day tumble.
Gold Wins Technical Reprieve, Interest in Futures Building
A 0.1 percent advance from spot gold this past session is more technical than it is convincing. Rather than call a turn, this reflects a sense of stabilization from the previous week’s break and sharp selloff. Further coloring the situation, volume in the futures and ETN world show little interest in this turn while holdings on the latter market continue to retreat. From futures, there is a noteworthy increase in open interest building for the August contract – the one deferred – with rolling on volume becoming a more common in other assets as well like VIX futures.